Why Basel III could jumpstart Asia’s high-yield market

Author: Ashley Lee | Published: 9 Nov 2012
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Asia’s high-yield market may reach new heights in 2013 because bank lending will not be as accessible. But Asian investors must become more open to investing in notes with low credit ratings.

Conventional bank lending has by far been the most popular means of financing for SMEs in Asia in the last few years because there is so much liquidity in the market. But the implementation of Basel III in January 2013 could change that.

Panelists at a high-yield conference co-sponsored by Asifma and Latham & Watkins predicted that banks may be more reluctant to lend to SMEs once Basel III is implemented in January 2013, which means increased interest in the high-yield market.

“Between 1993-97 there was a golden age of high-yield because the banks were under capital constraint,” said Milbank’s Anthony Root. “But now Asia is awash in liquidity and bank loans are cheaper and easier.”

Although domestic banks are doing well, they may limit the number of new loans or carry out less restructuring of existing loans to decrease risky assets.

Root said Asian investors have been previously reluctant to turn to the high-yield market. “The instinct in Asia culturally is driven by relationship and less by structure and documentation,” he said. “There’s hesitance by Asian CFOs and chairmen to make themselves beholden to unknown public investors versus having a friendly relationship with a banker.”

Investing down the yield-curve

While that may change, panelists agreed that it may be difficult to grow the market without more investors willing to venture down the yield-curve.

One commented that part of the popularity of high-yield in the US and Europe is because you have so many funds and portfolio managers that focus solely on high-yield.

“This is one of the big reasons why US investors are more comfortable with triple-C paper and more aggressive structures,” he added. “The buy-side in Asia has not yet developed this level of specialisation.”

Although some panelists said that even single-B issues were difficult, recent notable high-yield deals were frequently mentioned. They were especially interested in emerging markets such as Mongolia; the single-B rated Trade and Development Bank of Mongolia was a highlight.

But it may be more difficult for triple-C and unrated issuers to attract investors.

However Root also predicted that ratings will go up for Asian issuers because a crucial factor is the overall improvement of strength in the credit of the sovereign.

“There was always a cap on the coupons, but as the sovereign ratings go up, issues will increase,” he said.

See also

How Basel III will limit Chinese bank financing http://www.iflr.com/Article/3113603/Lending/How-Basel-III-will-limit-Chinese-bank-financing.html

China junk bonds pilot scheme will have limited impact http://www.iflr.com/Article/3035495/Search/Results/China-junk-bonds-pilot-scheme-will-have-limited-impact.html?PageId=201716&Keywords=high-yield&OrderType=1&PageMove=2

Schaeffler’s retail high-yield precedent http://www.iflr.com/Article/3081592/Schaefflers-retail-high-yield-precedent.html